2018 is shaping up to becoming a better year for Initial Coin Offerings (ICOs) after a great 2017. With their glowing references, they have become the major method of fundraising used by crypto and blockchain-based startups and companies.
This, in addition to the frenzy around cryptocurrencies, has been responsible for their growth in popularity. However, despite their widespread use, there are still fractions of the world with limited knowledge of ICOs and how best they can be used.
ICOs can be described as a form of fundraising used by companies to raise capital from different sources via the sales of digital tokens or coins. This method allows companies and firms to sidestep the more traditional way of investing by choosing the concept of tokenization over ownership shares and company stocks.
While as with cryptocurrencies, scams and regulatory control are the issues plaguing their adoption, categorization is another challenge faced by the ICO market in general. ICOs could be offered as utility tokens as well as security tokens amongst others.
The major issue with the categorization is that several tokens offered as utility tokens are classified as security tokens under certain jurisdictions. You see, with the federal laws on Securities and other relative laws in place in several countries across the globe, a violation of these laws on that account is in order.
Hence, the need to understand the features of security tokens and tell them apart from the other forms of ICOs is crucial.
What Sets Security Tokens Apart?
In most cases, participating in an ICO is seen as an investment opportunity which would further classify the tokens as securities. However, a critical look at the offers made would point out that this is not always the case.
For a token to be considered as a security token and subjected to the governing regulatory requirements, an application of Howey Test should give a roundabout classification. Under this test, the investing user is investing money and expecting profits from the investment.
Furthermore, the investment must be in a ‘common enterprise’ and profits realised are from the efforts put in by a third-party and not the efforts of the investor. This is because utility token offerings ensure that the user, in this case, has a large say in how his money would be used.
Could Security Token Offerings Shape the ICO Landscape?
It is no news that regulatory constraints are one of the major issues faced by the crypto sphere and the ICO landscape in certain countries especially the US. However, issuing regulatory-abiding tokens is not only cheaper but also quite efficient.
Given the alarming rate at which scams are masquerading as ICOs, STOs offer the companies and participants protection as well as reduction of legal risks. Especially since only accredited investors and organizations are liable to participating.
Most organisations deem the regulatory frameworks in place for securities as constraining. As a result, many of these organizations conduct their businesses in places with fairer regulatory frameworks.
However tough these regulatory frameworks seem, the likes of tZERO, KODAKCoin and Polymath have made the possibility of the rise in popularity of STOs more feasible. Especially given the risks involved in other forms of ICOs, STOs might just be what the ICO landscape needs in the future to stay ahead of the game.
Iyke Aru is a seasoned author and educator in the blockchain and cryptocurrency industry. He has been in the business of crypto content writing for many years with thousands of his articles across several platforms on the internet. Iyke is based in Nigeria where he stands out as one of the most informed and credible figures in the cryptocurrency industry. Outside blockchain and crypto, you will most likely catch Iyke playing or discussing football with friends and family.